Lending Down as Consumers Tighten Their Belts

Consumer lending is slowing down, from a 10-year-high of 7.2% last October to 6.1% this March. That’s the verdict from the British Bankers Association (BBA). March’s lending figure is also down compared to February’s 6.5%, with those seeking credit cards and loans particularly affected as consumers begin to watch their debt-induced cash a little more closely.

The BBA’s annual report shows that the total net consumer borrowing on personal loans, overdrafts and credits had dropped to £247 million – compared to £337 million and £458 million in February and January, respectively. Indeed, January was considered a blip – a massive spike that interrupted the otherwise steady decline in lending we’ve been seeing since October 2016.

Consumers in the market for a mortgage were also affected, with a 2.8% slump; in February house purchase loans totalled 42,247 compared to 41,061 in March. Discussing the mortgage decline, Capital Economics’ Hansen Lu said:

‘Price expectations, while positive, are down compared to the start of last year. With demand growth stalled and price expectations having eased, it’s no surprise that both prices and mortgage approvals are struggling to make headway. Looking at the bigger picture, it is true that factors such as the drop in buy-to-let activity, the squeeze on real incomes, and the slower rate of job creation seen over the last six months are acting as headwinds on the housing market.’

The BBA believe that these slumps are a reaction to UK consumers’ reliance on spending on credit (or debt) – and as inflation rises, fewer consumers are confident of their purchasing power. According to Eric Leenders, the Managing Director for Retail Banking at the BBA:

‘In March, annual growth in consumer borrowing from the main high street banks slowed, perhaps mirroring the dip seen in retail sales volumes as price rises appear to have started biting into consumers’ spending.’

The report from the BBA closely chimes with two other recent reports. One, from GfK, showed that as concerns about personal finance, and the wider economy, take hold, consumer confidence had dropped to -7. Meanwhile, Price Waterhouse Cooper reckons there’s been a 1% drop in consumer spending, down from 3% in 2016 to 2% in 2017. They further estimate that growth will dip to just 1.7% next year.

However, there’s good news for commercial companies. The BBA’s study has shown that borrowing has increased for non-financial companies – March saw the borrowing rate rise to 3.5%. Much of this has been driven by increasing lending to both wholesale and retail sectors, as well as manufacturers and construction companies.

‘It looks inevitable that the fundamentals for consumers will weaken further over the coming months with inflation continuing to rise due to the weakened pound and companies likely increasingly looking to hold down pay to limit their total costs. Indeed, it looks probable that inflation will move clearly above earnings growth over the coming months. Furthermore, the labour market also looks likely to come under mounting pressure despite its recent resilience.’

Still, with figures like this, there remains some doubt over the UK’s economic growth – with many experts fearing that uncertain economic developments, such as Brexit, mean cautious consumers continue to tighten their belts each month.